Daily Fintech Conversations

Old-fashioned financial engineering in Home Equity!

I can’t contain myself. This reminds me of the good old days.

In case, you missed the new trending Fintech topic about Point (only because it is backed by Andreesse Horowitz and Vikram Pandit)

There are many details that are not clear but to me it seems that

The point (about Point), is they say (in the US):
Sell part of your home At Market & GIVE AWAY ATM (at the money) warrants to Point!

What do you all think?

At first glance this seems like refinancing i.e. consumer gets cash now but less equity in the future. Whether that is a good idea for consumers is of course debatable (less debt tends to a good thing but cash now can make good things happen). There is clearly demand for refinancing and if they have an easier way to do that then it could be a big deal. But maybe I have missed the Point (ha, ha, gnarf, gnarf).

BTW, Efi is being modest in referring to “old days” as that was Salomon Brothers when Mortgage Backed Securities (MBS) were being invented. If you want to know how this stuff works under the hood, “ask Efi” is a good solution.

Guess I missed this one, but very glad to see this, it’s an approach that is way over due & I’m happy it is being sussed out. I have been playing with real estate derivative biz models for fun over the last 10ish years.

I will report back after I speak with them. I put in a call to Point on behalf of a few clients with a lot of equity in their properties who are getting raked over the coals by hard money lenders. Hate to see financiers taking advantage of people in a bind, this option (it is an option) looks on the surface to be a viable alternative.

Looking at the calculator and its assumptions.

Sample transaction with Point paying for 10% of today’s home value in exchange for 25% of the home’s appreciation… Point normally collects a processing fee of 3%.

They buying an option on 25% of the appreciation, and paying net of 9.7% of the current home value as the premium.

  1. Point is getting to ride on top of the leverage of any existing mortgage & homeowner equity. That is a free leverage to Point.

  2. Point is also getting 2.5% points of appreciation for each 1% of the underlying property’s value which they provide liquidity for (the option premium paid to homeowner). That is 2.5x return, so not bad from Point’s perspective.

The few calculations that I ran had Point realizing double digit APR returns. Those returns were higher on the shorter time horizons, (when holding the property’s appreciation rate consistent).

Renting & Rental Income - They say that they only apply a pre-payment penalty of sorts when the option is retired, if the property is not owner occupied at the time of origination of the option.

This is sort of interesting as I have worked on a few biz models to Crowdsource or apply P2P methods to single family rental income properties. I see no reason they cannot add a rider or addedem to the option contract to capture some of the economic value of the rental income (in the same way stock market options are adjusted for dividend payments).

I dont think this would be a violation of the homeowner’s interests because the option is last in line if the property depreciates, so Point is exposed to considerable risk there.

On top of that, an option should traditionally mirror the economic value of the equity of the underlying asset, which includes rental income.

They had an FAQ on “Death of owner & estate planning”, there are a few interesting aspects to this to consider. An option may provide a viable alternative to more common methods. I’d have to think more about it.

All in all, I think this is a viable way to begin chipping away at the Liquidity Risk inherent in the existing Real Estate markets. We need more efforts focused on reducing Liquidity Risk, these efforts are going to require financial engineering efforts that are enabled by new technologies.

Edit:

They called me back. The highest LTV they will go is 15%, good risk management. They have no interest in rights to rental income. They are only in CA & WA right now. I asked about FL and they said maybe in 12 months. I wonder what the licensing requirements are, I would assume Real Estate Broker, which is not hard to get. They also didnt seem to be interested in dealing with or making markets in any other types of Real Estate Derivatives.